Optimism is building about a recovery in the US housing market but plenty of
questions remain, writes Richard Blackden.

'Forecast: Home prices will rise 6pc in 2013,’ read a recent headline in USA Today.

No wonder President Barack Obama was in such combative mood when he delivered his second inaugural address on Monday. An improving economy will make it easier to push through his political agenda over the next four years. As freezing temperatures descended on much of the US this week, it was not just the White House that was being warmed by the cheer from the housing market.

For the past five years, mortgage enquiries were more likely to have been addressed to a bank’s legal department rather than to its loan officers. America’s lenders were hit by a wave of legal action stemming from wrongdoing in the final years of the housing boom and the subsequent bust. But banks’ results for the fourth quarter of last year show that, after feasting on the last housing boom, they are now beginning to feed on the market’s emerging recovery.

JP Morgan’s mortgage revenues more than doubled last quarter, echoing the performance of rivals including Bank of America and Wells Fargo. “They are making money hand over fist in the mortgage business,” said Clifford Rossi, a former director at Citigroup and now a professor at the University of Maryland.

The business of mortgage lending is receiving support at both ends. The growing confidence that house prices have reached a bottom is stirring demand from buyers. Then, once banks have dished out mortgages, the Federal Reserve is on hand to buy those loans as part of its latest Quantitative Easing (QE) programme. The purchases are part of the effort to support the housing market, but also a reminder that QE in all its guises has been a blessing for banks.

As we enter 2013, the broader question for the US and the global economy is whether an improving housing market can turn a still lacklustre American recovery into something more robust. There is no doubt that recent evidence on both house prices and sales is promising. Prices climbed 5.6pc in the 12 months to November, the Federal Housing Finance Agency said on Wednesday. A day earlier, figures showed the volume of home sales last year should be at the highest level since 2007.

There is also encouragement to be taken from how quickly homes are being snapped up once the “For Sale” sign is hoisted. The average sale period fell to just over four months in November, the lowest level since 2005, according to the National Association of Realtors.

All the evidence has forecasters believing the housing market will make a meaningful contribution to US growth for the first time since the word sub-prime entered the global vocabulary five years ago. It is a conviction hardened because US households have shrunk their debts. After peaking at 134pc in the third quarter of 2007, the ratio of household debt to disposable income reached 113pc in the third quarter of last year – the lowest level in a decade.

“It’s the confidence effect,” says Michelle Meyer, an economist at Bank of America. “People feel a lot better about their finances if they think the housing market has turned.”

Economists at Standard Chartered estimate housing and construction will add half a percentage point to US growth this year — not to be sneered at when the economy is expected to have clocked up growth of just over 2pc last year.

However, amid the encouraging signs three important notes of caution need sounding. First, new mortgage rules are still being written by a consumer watchdog established by the Dodd-Frank Act, and they will restrict Americans’ access to the mortgage market. While ultimately sensible given the excesses during the boom it will also mean some buyers, particularly first timers, will find it tougher.

Second, the role of Fannie Mae and Freddie Mac in the housing market remains unresolved. Established by the US government to expand home ownership, these ostensibly private companies bought trillions of dollars of mortgages from US banks during the boom and sold them on to investors who believed the organisations had an implicit guarantee from the government.

When house prices crashed, the US Treasury was forced into a $190bn bail-out in 2008 and Fannie and Freddie remain under government control. Some are now pushing for their eventual dismantling, which experts say will result in a smaller mortgage market.

Third, and perhaps most important, America’s housing market remains on an elaborate system of life support administered by the Fed. At some point, the central bank will lift interest rates and stop hoovering up $40bn of mortgage-backed bonds a month. Economists at Bank of America believe the housing market will enjoy two years of gains before interest rates begin to rise.

The contribution that housing and construction make to the economy over the next two years should help cement the recovery. But more than six years on from the peak in house prices, a clear picture of housing’s role in driving the US economy over the next decade is elusive. This is a housing recovery with a lot of long-term question marks.

The Telegraph Investor

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